Vendor-managed Inventory for High Value Parts€¦ · management and holding strategies. Vendor-managed inventory (VMI) has become an option not only to C-class parts but also to

1

Peter D. Franke

Vendor-managed Inventory

for High Value Parts Results from a survey among leading

international manufacturing firms

2

Imprint Berlin Institute of Technology Scientific Series on Logistics Special Edition 3 January 2010

Peter D. Franke

Vendor-Managed Inventory for High Value Parts – Results from a survey among leading international firms

Edited by: Prof. Dr.-Ing. Frank Straube Berlin Institute of Technology Strasse des 17. Juni 135 10623 Berlin Germany Publisher: Universitätsverlag der TU Berlin Universitätsbibliothek Fasanenstrasse 88 10623 Berlin Germany Tel.: +49 (0)30-314-76131 Fax.: +49(0)30-314-76133 [email protected] http://www.ub.tu-berlin.de Printed by: docupoint GmbH Magdeburg

ISBN 978-3-7983-2211-0 (print version)

ISBN 978-3-7983-2210-3 (online version)

© Chair for Logistics, Berlin Institute of Technology

This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the

rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way and

storage in data banks. Duplications of this publication or parts thereof is permitted only under the provisions of the German

Copyright Law of September 9, 1965, in its current version. Violations are liable to prosecution under the German Copyright Law.

3

The Logistics Division at Berlin Institute of Technology

For more than 30 years the Logistics Division in the Department of Technology and

Management at Berlin Institute of Technology (TU Berlin) has been renowned for

excellence in research, teaching, and professional training. The department is one of the

largest of its kind in Europe, with seven professors, more than 40 members of staff and

some 250 students attending its classes.

About the Editor

Professor Frank Straube is Managing Director of the Department of Technology and

Management at TU Berlin and holds the Chair for Logistics. He is a board member of the

European Logistics Association (ELA) and was vice chairman of the German Logistics

Association (BVL) from 1997 until 2009. In addition, he is a member in supervisory and

advisory boards of a number of logistics firms. As an active member of the European

logistics community, he publishes extensively on the subject of logistics and is a renowned

speaker in national and international conferences.

About the Author

Peter D. Franke holds degrees in Economics and Political Economics from the London

School of Economics. He spent the first years of his career as a logistics consultant working

mainly for manufacturing firms. Later he became purchasing manager for Rolls-Royce, the

Aero Engine manufacturer. Today, he works as researcher at Berlin Institute of

Technology, focussing on logistics challenges in small volume manufacturing firms and on

strategic topics related to the logistics service industry.

4

Acknowledgements

This publication is the result of a survey among SCM professionals from manufacturing

firms. We would like to thank all survey participants for their valuable inputs, which made

this publication possible. The survey built on the fruitful discussions we had in the

workshops for practitioners organised by our “Small and Medium Batch” research group.

We therefore also thank all workshop participants for their continued support.

In the preparation of the survey and in the preparation of this report we received strong

support from Christian Paratsch, Stefan Scheuffelen and Oliver Wirths who worked on this

topic as part of their diploma theses. Finally, Marcus Lindenau deserves thanks for his help

in making the document ready for publication.

5

Table of Contents

1 Introduction ................................................................................................................. 6

2 The Background ........................................................................................................... 9

An Introduction to High Value VMI ................................................................... 9

Structural framework ...................................................................................... 12

3 Survey Methodology .................................................................................................. 14

Hypotheses ...................................................................................................... 14

Survey Technique ............................................................................................ 14

Structure of the report .................................................................................... 14

4 Scope of VMI .............................................................................................................. 16

Firms in the Survey .......................................................................................... 16

The scope of high-value VMI ........................................................................... 16

5 Parts and Supplier Selection ...................................................................................... 20

Parts Selection ................................................................................................. 20

Vendor Selection ............................................................................................. 22

6 Incentives and Challenges .......................................................................................... 25

Benefits ........................................................................................................... 25

Problem areas ................................................................................................. 28

7 VMI and Consignment Stocks .................................................................................... 34

8 Information Flows ...................................................................................................... 40

Data shared ..................................................................................................... 40

Technologies applied ...................................................................................... 41

Update Frequency ........................................................................................... 44

Replenishment Decision .................................................................................. 45

9 Physical Flow of Goods .............................................................................................. 49

Model 1 – Standard VMI-setup ....................................................................... 50

Model 2 – 3PL-based VMI ............................................................................... 51

Model 3 – Close collaboration VMI ................................................................. 52

10 Recommendations for the Implementation .............................................................. 53

11 Glossary ...................................................................................................................... 58

12 Bibliography ............................................................................................................... 59

6

1 Introduction

The “Small & Medium Batch” research group at the Centre for Logistics at Berlin Institute

of Technology started its work in February 2009. The group has been studying the specifics

of supply chain management in firms producing small and medium size batches of usually

technical complex products, like aerospace, heavy industry and railway manufacturers. As

part of the research, a series of workshops was organised, taking place in different

production sites.

A major challenge for the participating firms is the cost of inventories. Combined with

often limited space in historical manufacturing sites, with products much bigger than they

used to be years ago (e.g. power turbines) and a general trend towards shifting

responsibilities to suppliers it leads to new thinking with regards to inventory

management and holding strategies. Vendor-managed inventory (VMI) has become an

option not only to C-class parts but also to high-value items, which are critical in the

production process.

In September 2009, the "Small & Medium Batch" research group invited around 70

international manufacturing firms to participate in a study on VMI for high-value parts. We

were delighted to find that there was great interest in the study. We received back 11

questionnaires from firms practicing VMI for high-value parts. Many of the other firms

invited let us know that they did not yet have any experience in VMI for high-value parts

and thus would not be able to fill in the questionnaire, but were beginning to implement

programmes and hence would be interested in receiving the results. This reflects that the

issue is highly topical and it encouraged us to publish our findings despite the rather small

number of replies.

7

The questionnaire comprised 28 questions, formulated to yield information about the

driving forces behind high-value VMI and success-factors for implementation. The results

of our analysis and of the accompanying research are presented in this report. We hope

that the report will:

allow you to learn from firms who have implemented VMI successfully with many

suppliers

help to understand the alternative models available for implementing VMI from

the strategic level down to physical processes

provide strong arguments to convince partners and internal stakeholders of the

benefits of VMI

Berlin, January 2010

Peter D. Franke

Berlin Institute of Technology

8

9

2 The Background

An Introduction to High Value VMI

Vendor-managed inventory implies shifting the responsibility for management of

inventory at the buyer’s premises from buyer to the vendor (Figure 1). The vendor makes

forecasts, replenishment decisions and, in some cases accepts inventory ownership until

consumption of the stock (consignment stock arrangement). The buyer’s role switches

from active inventory management to a more passive task of providing timely and

accurate information regarding consumption and inventory levels (cf. Kuk, 2004; Simchi-

Levi et al., 2008).

Figure 1: Inventory Management Models according to Supply Chain Digest (2009)

Inventory Management Model

Inventory ProcessBuyer Managed

InventoryVendor Managed

Inventory

Consignment/Vendor Owned

Inventory

Inventory Forecast & Planning

Buyer Buyer Buyer

Inventory Management Buyer Buyer Vendor

Inventory Ownership Buyer Vendor Vendor

10

The origins of VMI lie in the consumer goods and retail industry. Companies such as Wal-

Mart and Proctor & Gamble have developed VMI in the late 1980’s. The following example

highlights the reason for adopting the practice:

A retailer offers a wide range of products with different characteristics and demands. It is

difficult for him to forecast demand for this diversity of products and avoid stock-outs.

However, to him this is not so harmful: He knows that if the consumer comes into a store

to buy a specific brand chocolate bar and a detergent and does not find the chocolate bar

he wanted, he will in many cases buy the detergent and choose a different chocolate bar

instead of the desired one.

For the supplier of the originally desired chocolate bar the situation is different. He has a

great incentive to keep the shelves well replenished to make the sale and he knows best

the demand for his product. This explains why in a retail/ consumer goods environment

the suppliers are usually in the driver’s seat.

Actually, some retailers today purposefully risk certain products to be occasionally out of

stock because they have found the cost of a never-out-of-stock logistics policy to be higher

than the losses due to out of stock situations. We can expect this behaviour to motivate

even more suppliers to accept the ownership of inventory.

VMI in the retail environment has positive effects for the buyer and the vendor. For the

buyer the administrative burden is reduced and he can expect higher sales. He has to

watch his inventory though since the supplier has an incentive to raise levels of inventory.

This problem can be dealt with by transferring inventory ownership to the supplier. The

supplier benefits from the better sales and inventory information he receives. He can sell

more and still reduce his inventory. Better planning ability also allows him to improve the

planning process and reduce production and transportation costs (cf. Lee et al. 1997;

Gümüs et al., 2008; Disney et al., 2003).

11

In the low to medium volume industries, which are the focus of this study, the situation is

different: First, like in all manufacturing industries, the supplier does usually not have

better information about demand for final products than the buyer does (This may be

different with respect to spares). Second, demand for parts is often volatile, influenced by

intentional or unintentional changes in production plans. Moreover, unlike in retail and

consumer goods, many of the purchased items are designed and manufactured to

specification. The supplier cannot pool the demands from several customers to even out

fluctuations. Third, the buyer has a strong incentive to avoid stock-out situations, as any

stock-out will disturb production.

So, why are VMI practices adopted in this environment? Clearly, it would have to be

driven by the buyers and not by the suppliers.

One well-known form of VMI in manufacturing industries is quite common also in low to

medium volume firms: C-Class parts management organised by a service provider (often a

wholesaler of C-Class parts) who manages the stocks of these parts usually through a

paperless ordering system (e.g. Two-Bin Kanban), thereby drastically reducing the

administrative burden for the customer. The buyer usually only pays for the parts aw they

are consumed giving an incentive to the supplier to keep inventory down and the price of

items usually comprises a handling fee for the service provider.

With respect to high-value parts, however, the situation is more complicated. Quantities

required are smaller than for C-Class parts, demand volatility is even higher and most

likely the parts are made to specifications.

These considerations suggest that the issue of high-value VMI in low to medium volume

industries is worth to take a closer look. They were the starting point of our interest in the

organisational set-ups and incentives in High-Value VMI.

12

Structural framework

To analyze High-Value VMI we first designed a structural framework, which presents the

options available to firms when implementing VMI. VMI can be designed in many ways to

adapt the needs of the company. Through intensive desk research, fourteen key

characteristics of VMI systems have been identified and are presented in the framework

together with corresponding implementation alternatives (cf. Blackhurst et al., 2006;

Sarpola, 2007).

Our VMI framework (Figure 2) is divided into three major sections: The commercial

arrangement, the flow of information and the flow of goods. The commercial arrangement

is the foundation of the VMI system. In this section the options available mainly relate to

the question

Who has responsibility for which parts of the process?

In the section regarding the flow of information the overall question to be answered is

What information is to be transferred when and how?

Finally, the third section deals with the physical flow questions and defines options

relating to the question

Where is stock held and in which form?

This framework provided the structure and content for our survey questionnaire the

results of which are presented in the following chapters.

13

Figure 2: Structural framework of VMI

Commercial Arrangement

VMI Partner Vendor 3PL Combination/ Other

Parts delivered Single parts Kits Batches

Point of change ofownership

Pick-up of part Delivery Consumptioninto shop floor

Paymentreceived from final customer

Point of custodial ownership


Delivery of finalproduct

Compensation in case of production delay

None Compensation fee

Parts paid latest X days after

delivery

Other

Flow of Information

Replenishment Technique

Kanban Fixed Min/Maxlevels

Reorder Point/ Quantity

Other

Information shared Shipping Orders Demand Forecast

Items in Stock Stock Consumption

Signal

Customer Orders

Signal capturing Scanner RFID Webcam Physical Kanbansignal

Manual

Signal transfer Manual (mail, phone, fax)

Automatic Email 1-Way web-based platform

2-Way web-based platform

Connected MRP systems

Transfer frequency Realtime Daily X times per week

Weekly

Shipping authorisationnecessary

yes No

Flow of Goods

Inventory held at Vendor External Warehouse

On-site warehouse

Shop-floorbuffer

Partitioning of warehouse

No partitioning Separate on part level

Separate area for each vendor

Separate area for all VMI

Location of shop floor preparation

Vendor External Warehouse

Onsite Warehouse

Assemby Line

14

3 Survey Methodology

Hypotheses

From the framework described above, we derived a number of hypotheses bringing

together the options in the framework and our expectations regarding the choices made

in the low to medium volume environment. These hypotheses are highlighted in the

section outlining the results from the survey below. Not all our hypotheses could be

verified. We were surprised with some of our findings. The findings relating to the

hypotheses are also highlighted in the text.

Survey Technique

The questionnaire consisted of an Adobe©-Form which contained 28 questions. After

filling in the respondents could send back the data by pressing a “submit” button in the

form. This allowed us to load the data into a spreadsheet program for evaluation

automatically.

In subsequent telephone interviews critical questions where discussed with the

participants. This also gave us the opportunity to obtain further background information,

which was valuable for us in the overall interpretation of the survey results.

Structure of the report

In the following section, we describe and interpret the findings from the survey. The

structure roughly follows the logic of our VMI framework. We start by giving general

information about the participating firms and the scope of their VMI systems (chapter 4).

We then look at the commercial issues in VMI. This begins with selection criteria for parts

and suppliers and the question whether to involve a 3PL in the arrangement (chapter 5),

followed by a chapter on the incentives and problem areas (chapter 6) and finally a

discussion of the combination of VMI with consignment stocks (chapter 7).

15

The next chapters are devoted to information and physical flows (chapters 8 and 9). We

discovered that the physical processes are highly dependent on the specific circumstances

of a particular enterprise. In Chapter 9 we therefore attempt to combine the physical

process view with other findings from the survey in three models of VMI applied in the

surveyed companies. Chapter 10 gives recommendations for the implementation of VMI,

again following our framework.

16

4 Scope of VMI

This section contains some general information about the firms participating in our study.

All further results will have to be seen in the light of the years of experience, which the

firms have, and the extent to which they apply VMI.

Firms in the Survey

Low volume manufacturing makes up an often-underestimated portion of industry. Single

item and low volume manufacturing are the most applied method of production in the

machinery industry, 58% of all production belongs in this category in Germany (cf. Som,

2007). The importance of low volume production is growing with lean manufacturing

methods and rapid manufacturing technologies being increasingly applied.

The participants in the survey were all logistics professionals from firms producing small to

medium batches of technology products, mainly firms from the aerospace, rail, robotics

and machinery industries. The participants in the study represent firms with average

revenues of US$ 30 billion, all large multinationals. Participants are from Germany and the

United States.

The scope of high-value VMI

The most experienced companies in the sample have been practicing VMI for 10 years as

is shown in

Figure 3. Among the companies polled, we defined a group of more experienced VMI-

practitioners. 5 out of 11 companies have been running a VMI-system for high-value parts

for 4 years and longer. This group of firms has been looked at more closely in all further

analyses.

17

Figure 3: Years of experience in VMI

0

2

4

6

8

10

12

Year

s

Company

experienced less experienced

18

VMI is applied for very different numbers of parts depending on their special

circumstances but the clear majority of firms are planning to extend the schemes (Figure

4). This proves that VMI is in fact an issue in the industries in focus. 7 out of 11 companies,

including some of the most experienced, are currently planning to expand their VMI-

programmes, a proof of success. It is quite common to introduce VMI for all high-value

parts. Although, most companies do not plan to let their vendors manage all of those

parts, most companies have planned to include more parts. Half of the companies have

involved more than 10 suppliers and have managed to remove a considerable

administrative burden and inventory management responsibility (see Figure 5). Each

supplier who manages inventory for the buyer implies a smaller number of ordering

relationships, which the buyer has to manage actively.

Key findings

VMI is successfully employed in small volume

production environments – Most firms are planning to

expand their VMI-programmes

19

0

5

10

15

20

25

# o

f V

MI s

up

plie

rs

Company

Figure 4: Progress of implementation

Figure 5: VMI-suppliers

350

180

118

50 46 40 40 30 20 20

0

100

200

300

400

500

600

700

800

# o

f p

arts

Company

Already VMI Planned VMI

20

5 Parts and Supplier Selection

As explained in the introduction, in consumer goods and retail, VMI is usually driven by

the vendors who seek to deliver an as big portion of their items if not all in this form. In

contrast, in industrial VMI, driven by the buyers, the buying firm will need to select

suitable vendors and items; it is highly unlikely that all suppliers can deliver all their parts

in a VMI process at once.

Parts Selection

When asked how they select parts, 9 out of 11 companies answered they select parts on

the basis of their value – not surprising, since we explicitly focused on high-value items in

the survey (Figure 6); In addition, the physical size of parts turned out to be an important

aspect for selection. Several companies mentioned a further important factor in

subsequent interviews: Demand stability. Again not surprising since unstable demand

makes it more difficult for the supplier to manage the inventory, although in a stable Pull

production system, VMI should be able to survive unstable demand. While the question

whether a part belongs to a specific module seems to play a subordinate role in part

selection, we did find that experienced practitioners of VMI include Kits in their VMI

system. Kits contribute up to 70% of VMI items (see Figure 7).

This underlines that VMI is an instrument of empowering suppliers, allowing the buying

company to focus on production and distribution. The best suppliers supply kits of parts,

coordinating sub-tier or even same-tier suppliers and take over far reaching

responsibilities for the delivery of these kits including the management of inventory. An

additional advantage for the buying companies is that they can reduce the number of

suppliers with whom they have an active relationship.

21

Figure 6: VMI-parts selection criteria

Figure 7: Part Characteristics and years of experience

0 2 4 6 8 10

Physical sensitivity

Parts of specific subassembly modules

Criticality for production process

Physical size

Value

# of times selected

0

2

4

6

8

10

12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Company

Single Parts Kits Batches Years of Experience

22

Vendor Selection

Among the criteria for vendor selection, the characteristics of parts delivered by the

supplier and the duration of the business relationship with the supplier are the major

reasons to include a supplier in the VMI-programme (Figure 8). In contrast to what might

appear practical, the compatibility of the vendor’s infrastructure does not seem to be a

relevant aspect at all.

It is quite common with C-Parts to let a logistics service provider (LSP) manage the

inventory through a Kanban system. The VMI Partner is thus not the supplier of the parts

but the LSP who usually obtains a service fee for his service, which is still efficient because

the logistics processes for parts with a low value can be streamlined and the buyer has to

deal only with one partner instead of many suppliers. In addition, there are a number of

scenarios, especially in the electronics industry, where 3PL are taking the role of a VMI

partner (cf. Eitelwein et al.; 2008).

Concerning high value parts, however, we expected the majority of the companies to deal

directly with the vendors and not with a 3PL. The reason for this lies within the nature of

high value parts: Only a few vendors with a small range of high-value parts have to be

involved. It seems feasible to manage this without a 3PL who would usually charge a fixed

percentage mark-up to cover the cost of his services.

Figure 8: VMI-supplier selection criteria

0 2 4 6 8 10

Supplier delivers a small range of parts

Compatibility of supplier's IT-infrastructure

All parts of supplier suitable for VMI

Location of supplier

Past delivery performance

Long-term relationship with supplier

Characteristics of parts

# of times selected

23

Our expectation was correct: 9 out of 11 companies have established a VMI-model where

they deal directly with the vendors and omit handling by a 3PL. One company has parallel

models in place, one employing a 3PL and one where they deal directly with the vendors.

If we take a closer look at the two companies, which have mandated a 3PL, we can

observe that those two have included a considerable number of suppliers in their VMI-

programme, i.e. more than 10 (Figure 9).

Figure 9: VMI-partner

0

2

4

6

8

10

12

Suppliers 3PL

# o

f ti

mes

sel

ecte

d(m

ult

iple

sel

ceti

on

s p

oss

ible

)

2 companies- all have many suppliers- all are experienced

3 out of 10 companies- all have many suppliers- all are unexperienced

Hypothesis

Companies do not employ a 3PL for VMI when the quantity of

parts and vendors involved are small.

24

However, in the group of companies not cooperating with a 3PL we could also identify

three companies with more than 10 suppliers (Figure 9). Further investigation showed that

these were rather inexperienced practitioners of VMI. It seems that more experienced

companies counteract the complexity of having many VMI Partners by engaging a 3PL.

Key findings

The most important criteria for parts selection

are value and physical size.

The most important criteria for supplier selection

are characteristics of parts delivered and long-

term relationship with suppliers.

Experienced companies implement VMI for kits

of different parts.

Experienced companies with many VMI-suppliers

employ a 3PL even for their high-value VMI parts.

25

6 Incentives and Challenges

As VMI implies a significant change in the responsibilities of buyer and seller, the question

what the incentives are to accept this change comes natural. In this section, we look at

benefits of VMI to buyers and suppliers as well as at problem areas in VMI and ways to

overcome these.

Benefits

Asking buyers of VMI parts which benefits from VMI they experienced was a

straightforward exercise. However, since the suppliers of VMI were not included in the

survey, our analysis of incentives to suppliers has to rely on the information we received

from the buyers.

Benefits to the Buyer

We asked firms to rate in what intensity benefits occurred (Figure 10). Most of the

benefits are concerning a reduction of complexity through process improvements (e.g.

less administrative effort, reduction of transactions) and increase of delivery reliability

(e.g. improved service levels, reduction of safety stocks). We can see that the average

scores of all benefit areas are positive. Less administrative effort was mentioned most

often, followed by less transactions, higher service level, lower safety stock and faster

information with regard to real demand. All this is no big surprise; one would expect

administrative efforts to be reduced especially in procurement because the replenishment

administration is transferred to the supplier.

This generally positive picture is reinforced by the fact that nearly all companies plan to

expand their VMI-programme further.

Benefits to the supplier

To bring some light into the suppliers’ situation, we asked the buyers of VMI parts what

benefits the suppliers have, in their view (Figure 11). Possible benefits can be divided into

26

two categories: Process benefits and commercial benefits. We expected that suppliers like

buyers would benefit primarily from improved processes. As will be discussed in the next

chapter we would only expect buyers to make some commercial concessions where VMI is

combined with consignment stocks, in order to compensate the supplier for increase in

inventory to be financed.

The hypothesis has proven to be true: system-based benefits are named much more often

than commercial concessions. The responses as well as several comments showed clearly

that suppliers were very open-minded towards the introduction of VMI. It does certainly

not appear that partners are forced to manage the inventory. This would not also seem

unlikely with the power structures in the industries in question. Respondents stated that

their suppliers had great interest in real time information and that none had opposed to

the system. The underlying reason may be that in low to medium volume industries

suppliers are used to being exposed to an extreme requirement for flexibility. With VMI,

the suppliers are getting a lot more transparency of what is actually required and the need

for flexibility may be reduced.

Key findings

Buyer companies benefit from VMI

predominantly through process improvements

and increased delivery reliability.

Suppliers strongly benefit from the process

improvements through VMI

Hypothesis

Vendors are motivated by process improvements

rather than by commercial concessions to participate

in a VMI-program.

27

Figure 10: Benefits to the buyer company

Figure 11: Benefits to the suppliers

-2 -1,5 -1 -0,5 0 0,5 1 1,5 2

Outbound quality performance

Reduction of in-store process times

Capacity levelling in the production process

Inbound quality performance

Reduction of transactions

Improved service levels

Reduction of safety stocks

Faster information with regard to real demand

Less administrative effort

Average impact of benefits to the supplier -2 to +2 (-2 = strong negative; 2 = strong positive)

0 1 2 3 4 5 6 7 8 9 10 11

No direct benefits to the supplier

Higher item price paid

Service fees

Earlier payment

Additional business

Improved processes

Improved planning

Optimisation of lot sizes …

# of times selected

28

Problem areas

The main problems in a VMI-system arise from two different areas. On the one hand,

there may be problems to maintain optimal stock levels (stock-outs, excessive stock,

inability to cope with demand fluctuation), and on the other hand, there may be conflicts

with suppliers regarding inventory ownership, payment and trust issues (Figure 12).

Overall, the respondents seem to experience rather few problems. The biggest problem

area is around supplier conflicts. Process quality seems to be a lesser problem.

There may be many ways to cope with conflicts over inventory issues. We expected to

find, as already mentioned above, some form of compensation scheme in the case of

production delays at the buyer’s site. This would be of particular importance when VMI is

combined with consignment stocks (see chapter 7) but we are also looking at companies

without consignment stock arrangements. While a consumption stop is especially harmful

to companies delivering consigned parts, it also means a cash flow stop to other suppliers

when the maximum inventory level is reached and no more parts can be replenished.

The survey shows that 6 of the 11 companies compensate their suppliers in such

situations (Figure 13). While four of them buy the parts after a certain period, none pays a

compensation fee.

Hypothesis

Buyer companies establish up front standardised

regulations to limit negative cash flow effects to their

suppliers in case of production delays.

29

Figure 12: Problem areas

Figure 13: Compensation schemes for production delays

0 1 2 3 4 5 6 7 8 9 10 11

Stock-outs

Demand fluctuation too high to be dealt with

Excessive Stocks

Discipline to maintain information quality at buyer

Trust

Inventory ownership discussions

Payment discussions

# of times selected

0

1

2

3

4

5

6

None A compensation fee is paid to the supplier

Parts paid in full max x days after delivery

Other

# o

f co

mp

anie

s

30

A closer look at the two companies, which ticked “other”, is necessary here. These

companies stated that they have mutually agreed with their VMI-partner to solve such

issues depending on the situation. They do not to have any upfront regulations but rather

deal with such situations ad hoc. Hence, 7 out of 11 companies do not have a standard

procedure to deal with production delays – our assumption was wrong.

A further way to avoid conflicts can be to separate VMI parts from other parts. In total,

only four of the 11 companies assign designated spaces in their warehouse to VMI-parts

(for each part, each supplier or a general VMI-area) (see Figure 14). Some of the other

companies, which do not partition their warehouse, tag their VMI-parts visually to

differentiate them from other parts. Although, apparently, this cannot be related to the

implementation of consignment stock, there should be a reason for the companies to take

the effort and space to clearly separate the VMI-parts from ordinary parts to create

transparency in the warehousing processes. This higher transparency could help to cope

with the complexity of the new processes.

This can be measured by a reduction of administrative effort, in-store process times and

transactions. If we now compare the average score on these particular benefits between

the companies which do assign designated VMI-spaces in the warehouse and those who

do not, we find that the former, indeed, reach a significantly higher average score (Figure

15).

Hypothesis

Separation of VMI-parts from regular parts in the

warehouse helps to reduce process complexitiy.

31

Figure 14: Separation of VMI parts in warehouse

Figure 15: Average reduction of complexity depending on warehouse setup

0

1

2

3

4

5

Separation in the warehouse No separation in the warehouse

Ave

rage

occ

urr

ence

+ 115%

0

1

2

3

4

5

6

7

8

No designated space designated space for all VMI parts

designated space for each supplier

designated space for each part

# o

f co

mp

anie

s

32

Trying to find out what else companies do to avoid conflicts with suppliers, we looked

again at the selection process. A large group of the companies select their VMI-suppliers

based on the length of their relationship. We expect that those companies, which prefer

to do VMI with suppliers they had long-term relationships with, experience fewer conflicts

in the course of the VMI-partnership.

In fact, this hypothesis could be verified (Figure 16). It turned out that companies, which

did not select suppliers accordingly, experienced far more conflicts. This may not be

surprising, but it emphasizes the importance of mutual trust and respect, built up over

past relationships, for a collaborative handling of new systems and processes.

Overall, it was anticipated that benefits would outweigh problems from the point of view

of the buyer. What surprised us is that more experienced firms tend to see more problems

than the less experienced. The reason for this must be that in a longer time problems are

more likely to come up, or that in the years after implementation, VMI is more in the focus

and performance more closely monitored.

Hypothesis

Companies, which use long-term relationships as

selection criterion to choose their VMI-suppliers,

experience fewer conflicts over inventory ownership,

payments and trust issues.

33

Figure 16: Supplier conflicts depending on supplier selection criteria

+288%

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

Used long-term relationship as selection criterion Did not use long-term relationship as selection criterion

Ave

rage

occ

urr

ence

Key findings

The most common problems are conflicts over inventory

ownership and payments.

Companies that chose long-term relationships as criterion

for supplier selection experience fewer conflicts.

The majority of companies do not implement up front

compensation regulations to limit negative cash flow

effects to suppliers in case of production delays.

Separating VMI-parts from regular parts help to achieve

better process quality

34

7 VMI and Consignment Stocks

As was explained in the introductory section on VMI, the ownership of VMI often remains

with the vendor to give him a clear incentive to keep inventory down. However, as was

also explained, the driver in industrial VMI, unlike in the retail environment, is the buyer of

the goods in question. We were therefore interested to find out if, in the low volume –

high value environment, which is in focus here, consignment stocks play a big role or if

being able to concentrate on customers is a sufficient incentive for the buyers to organise

VMI systems.

It turned out that 6 of the 11 companies implemented consignment stock arrangements in

their VMI-programme. Four of them have their entire high-value VMI-parts on consigned

condition (Figure 17).

Interestingly, fewer of the experienced companies include consignment stock into their

VMI-model. Apparently, this is not a significant attribute of mature models and hence not

necessarily the incentive to organise VMI for high-value parts.

In those cases where VMI is combined with consignment stocks the question was what the

incentives would be for the VMI partner to accept this. For the companies, which do have

consignment stock, we expected to find a higher occurrence of commercial concessions

made to the VMI-partners, such as service fees or higher item prices.

Hypothesis

In the small volume environment, VMI is rarely

combined with consignment stocks

35

Figure 17: Number of companies running consignment stock arrangements

In addition, we expected to see more conflicts between the buyer company and the VMI-

partners over inventory ownership and payments. Two specific problem areas arising

from consignment stocks are anticipated:

Production Delays

In the case of production delays no material would be consumed and hence, the VMI-

partner would be cut off from cash flow without own fault. As a way to ease the situation

for the VMI partner, we expected the companies that use consignment stock

arrangements to implement some form of compensation scheme in the case of

production delays.

Consignment stock for all parts

Consignment stock for some parts

0

1

2

3

4

5

6

7

Consignment Stock No consignment Stock

# o

f ti

mes

sel

ecte

d

36

Damage during handling

Another field of conflict could be the handling of the consigned goods in the warehouse.

In many cases, the buyer company or a third party handles stock belonging to the vendor.

Therefore, we expected the companies contractually to set a separate point of transfer of

custodial ownership (i.e. the risk of damages), where the buyer starts handling the goods

(in most cases this is the pick-up or delivery of parts) irrespective of the transfer of

commercial ownership. Another possibility to work around this issue is to separate the

consigned VMI-parts in the warehouse from the regular parts to make sure these are

handled with the appropriate caution. Therefore, we expected to find a clear separation

of VMI-parts in the warehouse, with separate areas either for each VMI-supplier or at

least for VMI-parts in general.

Hypothesis

Companies which combine VMI with consignment

stock

experience more conflicts with suppliers

make more commercial concessions to suppliers

implement compensation schemes for

production delays

separate VMI-parts from the rest of the parts in

the warehouse

set custodial ownership to coincide with handling

responsibility

37

Figure 18: Average occurrence of supplier conflicts, commercial concessions, compensation schemes and warehouse setup for models with or without consignment stock

Surprisingly, none but one of these expectations could be verified in the survey! Among

the group of companies, which include consignment stock in their VMI-model, there was

no significantly higher occurrence of either commercial concessions made to the VMI-

partners, conflicts over inventory ownership, payment or trust, compensations schemes in

case of production delays or designated VMI-areas in the warehouses. Moreover, the

companies practicing consignment stocks did not report more conflicts than the others

did! The differences in the distribution were no higher than 25%, which cannot be

regarded as significant for a sample of this size (Figure 18).

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

Consignment stock No consignment stock

Ave

rage

occ

urr

ence

Compensation schemes

+ 20%

0

0,1

0,2

0,3

0,4

0,5


Ave

rage

occ

urr

ence

Designated spaces for VMI parts in the warehouse

+ 21%

0

0,2

0,4

0,6

0,8

1


Ave

rage

occ

urr

ence

Supplier conflicts

+ 4%

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7


Ave

rage

occ

urr

ence

Commercial concessions

+ 25%

38

Figure 19: Ownership and handling responsibility

Only our expectations regarding the regulation of custodial ownership could be verified

for 4 of the 6 companies using consignment stock models. Obviously, we would have liked

to analyse, if this arrangement helped firms to avoid conflicts but, unfortunately, our

sample is not large enough to make a rigorous statistical analysis. However, we decided to

take a closer look at those companies who do not separate custodial and commercial

ownership and found an interesting picture (Figure 19).

0

1

2

3

4

5

6

7

8

Set custodial ownership to match handling responsibility

Do not set custodial ownership to match handling responsibility

# o

f co

mp

anie

s

0

1

2

3

4

5

6

7

8

No designated space

designated space for all VMI parts

designated space for each supplier

designated space for each part

# o

f co

mp

anie

s

Company A:Trust issues

Company B:Discussions over Inventory ownership

and payment

39

These 2 out of the 6 companies who have implemented consignment stocks, which do not

set the custodial ownership to coincide with the handling responsibility, also do not

separate the VMI-parts from the rest in the warehouse. We would expect both to help

avoid conflicts arising from said discrepancy of commercial and custodial ownership. It

turns out that one of these companies is 1 out of 2 companies, which mentioned trust

problems, and the other is 1 out of 3 companies, which mentioned inventory ownership

and payment problems (Figure 19). As pointed out above, this cannot be proven a

statistically significant correlation, but it may be a hint on the possible nature of the

relationship between these aspects.

Key findings

It is rather common to combine VMI with consignment stock.

Companies which combine VMI and consignment stock, do

not make more commercial concession or have more

conflicts with suppliers.

But they do arrange custodial ownership to coincide with

handling responsibility of goods.

40

8 Information Flows

Data shared

To map the flow of information, we asked which data is provided to the VMI-partner, how

it is captured, how it is transmitted and what the VMI-partner is doing with it.

We expected the companies to transmit all the information necessary for the

replenishment process. This comprises data on demand forecasts for planning, as well as

information regarding inventory levels. This information can either contain items in stock

and/or a signal when parts are consumed.

If we look at the information transferred to the VMI-partner, we see that all the

companies provide demand forecasts, 9 of them also transfer the number of items in

stock and 5 send a signal when parts are consumed (Figure 20).

Looking at the answers of each individual company reveals that all but one transfer the

number of items in stock or a signal when parts are consumed from the warehouse

(allowing the calculation of stock levels) or both. One company, which does not transfer

inventory data, turned out to employ a 3PL-based model where the 3PL collects the data

himself. Therefore, we can conclude that in all cases the VMI-partners receive demand

forecasts and information on stock levels. Our hypothesis is true. Demand forecast and

stock levels are vital for any VMI-system.

Hypothesis

All companies will provide a demand forecast and

information regarding their inventory level.

41

Figure 20: Information transferred to the VMI-partner

Technologies applied

We also asked which technologies are used to capture the inventory data and stock

movements. Due to the importance of high value parts and their likely criticality for the

production process, we expected that companies would put high effort into the proper

monitoring of processes and stocks and to use the best technology available (like RFID) to

avoid any mistake stock information.

The survey revealed a different picture (Figure 21): 9 of the 11 companies used

conventional scanners to capture the data. Not a single company used RFID or other novel

devices, such as webcams that let the suppliers literally look at stock levels.

0

2

4

6

8

10

12

Demand forecasts Items in stock Signal when parts are consumed

Actual orders from your customers

Suggested shipping orders

# o

f ti

mes

sel

ecte

d

Hypothesis

The most advanced companies use RFID technology to

capture inventory data and stock movements.

42

Apparently, the advantages of RFID technology, such as traceability of items throughout

the warehouse and the ability to scan items in bulk, seem not to be relevant or at least not

to outweigh the costs in low to medium volume industries where quantities of parts and

shipments are low compared to other industry sectors. The absence of high tech data

capture solutions also suggests that there is a high level of trust between the VMI partners

that stock information will be accurate. We will come back to the issue of trust in a later

chapter. This trust is of particular importance when VMI is combined with consignment

stocks (see section 6).

As to the transfer of data to the supplier, we expected the companies to communicate in a

way that can easily be adapted to different companies’ IT systems, where data can be

accessed by both the vendor and the buyer and where some form of automation is

possible, making fax or email communication unnecessary for day-to-day operations.

While a direct connection of MRP-systems requires a high level of trust, a web-based

platform, with either one- or two-way communication seems to be the perfect candidate

for this task.

This hypothesis is true (Figure 22): 10 out of 11 companies base their data transfer on an

either one- or two-way web platform. These modules, that allow a rather customised way

to grant a ubiquitous access to the relevant data, appear to be industry standard. Only

two companies have their MRP-system connected to the VMI-partner’s infrastructure. To

the vast majority of the companies this represents a too critical intrusion into their

network. This explains why the compatibility of IT infrastructures is not at all a relevant

criterion for supplier selection to the companies, since the web platforms are totally

platform independent.

Hypothesis

Many companies use a web-based platform to

communicate their data to the vendors.

43

Figure 21: Technology used to capture inventory data and stock movements

Figure 22: Systems of data transfer

0

1

2

3

4

5

6

One-way web-based platform

Two-way web-based platform

Connection of MRP systems

Fax Manually sent e-mails

Auto-generated

e-mails

# o

f ti

mes

sel

ecte

d(m

ult

iple

sel

ecti

on

s p

oss

ible

)

0

1

2

3

4

5

6

7

8

9

10

Scanner Physical Kanban Signal

Manual RFID Webcam

# o

f ti

mes

sel

ecte

d

44

Figure 23: Frequency of data transfer

Update Frequency

Another aspect to the transferral of data is the refresh period, since the responsiveness of

the system depends on data being up-to-date. Therefore, we expected most of the

companies to transfer or refresh the data at least on a daily basis.

The survey shows that 9 of the 11 companies refresh the data at least every day, 6 of

them provide even real-time data.

0

1

2

3

4

5

6

7

Real-Time 7 Times a week 5 Times a week 3 Times a week

# o

f C

om

pan

ies

Hypothesis

The majority of companies refresh requirements data

at least once a day.

45

Replenishment Decision

The final step in the information flow is the replenishment technique employed. Vendor-

managed inventory does not necessarily give great flexibility to the supplier. Depending

on the circumstances and the object for which the model is used, the buyer and the

vendor can agree upon a more rigid or a more flexible model according to their needs.

While Kanban and re-order point/re-order quantity techniques represent rather rigid

frameworks where replenishment actions must be taken upon specific signals, Min/Max-

level arrangements just provide boundaries between which the VMI-partner needs to

keep the stock-levels and, thus, leave him a lot more autonomy and flexibility. Therefore,

we expect a majority of companies to apply Min/Max-level arrangements in their VMI-

model. Obviously, in every VMI system but especially in those without consignment stock

arrangement the partners will agree some fixed maximum inventory level to avoid

oversupply.

Hypothesis

Most companies apply a Min/Max-level replenishment

technique in their VMI-system.

46

Figure 24: Replenishment techniques

It turned out that this hypothesis was true (Figure 24): 8 out of the 11 companies use

Min/Max-levels as their replenishment technique. One firm is combining Min/Max with

Reorder Point replenishment. The company that installed the Kanban system applies a

special model: The supplier rents a warehouse on the buyer’s premises, which he can

replenish according to his needs and where he handles the flow of goods. The Kanban

system is only responsible for the replenishment between this warehouse and the buyer’s

production. In this example, the buyer transfers not only the inventory management but

also the warehouse management to the supplier.

It appears that the majority of companies prefer to grant the VMI-partners a wider

autonomy in the replenishment process. This allows them to optimise their logistics and

thereby achieve some benefits from the system (see section 6). The number of companies,

which let their VMI-partners ship parts without further authorisation, also shows the

importance of the autonomy of the VMI-partner. Since Vendor-managed inventory implies

the vendor to assume the responsibility of inventory management, we expected a very

high number of companies to allow the VMI partner to ship parts without further

authorisation.

0

1

2

3

4

5

6

7

8

9

Fixed Min/Max-levels Reorder Point- Reorder Quantity Kanban

# o

f ti

mes

sel

ecte

d

47

Ten out of 11 companies indeed do not require further authorisation of shipments

scheduled by the VMI-partner (Figure 25).

The one company insisting on authorization has established a very special model: There is

just one supplier in the VMI programme and the responsible person at the buyer company

is in constant close contact to him. Apparently, this is some sort of combined responsibility

for the inventory management.

Figure 25: Authorisation of shipments required

Yes; 10

No; 1

Hypothesis

The majority of companies allow their VMI partner to ship

parts without further authorization.

48

Key findings

All companies provide demand forecasts and the

number of items in stock and/or a signal when

parts are consumed.

None of the companies use RFID or webcams to

capture stock information.

One- or two-way web-based platforms to transfer

data are most common.

Data is updated and transferred at least once

daily.

Defined Min/Max levels are the most common

trigger for replenishment.

49

9 Physical Flow of Goods

This section describes the alternatives chosen in the physical flow of goods and at the

same time, it summarises the overall set-up of VMI in the participating companies. This is

because the physical flow heavily depends on the commercial set-up.

We found that the interviewed companies use three basic models, which mainly differ in

terms of the warehousing responsibility and location. Six companies use the standard

model (model 1). Two firms apply Model 2, which includes a 3PL. Three firms have

implemented VMI with suppliers who are delivering highly critical parts and who are

deeply integrated in the buyer’s processes, a system which we will call model 3.

The first choice under normal circumstances will be model 1. As was argued in chapter 5,

we only recommend to organise VMI via a 3PL when a large number of suppliers are

included in the system. Model 3 will only be relevant for critical suppliers and parts.

Our models may serve as simple blueprints for the implementation of VMI, with further

detail added from other parts of this report.

50

Figure 26: Model 1

Model 1 – Standard VMI-setup

In the standard setup (Figure 26), the vendor is responsible for replenishing the inventory,

while the buyer is responsible for supplying the necessary information to do so.

All companies transmit a demand forecast, actual items in stock and in some cases

additional information like stock consumption signals or actual customer orders, allowing

the vendor to replenish the inventory. The exchange of information is organised through a

web-based platform in almost all cases. The most common technique is to set Min/Max-

levels as boundaries for the stock of inventory.

We found that consignment stock is a common practice, although not all companies

practice it in this model. None of the buyers made commercial concessions but stated that

system-based advantages, like “optimisation of lot sizes in production and transportation”

were sufficient.

The buyer usually owns or rents a warehouse on his premises or close-by. Goods are

transported from suppliers’ premises to this warehouse and from there to the assembly or

production line. In one case, goods are delivered directly from the vendor to the buyer’s

shop floor buffer with a just-in-time arrangement.

Vendors

Production

Buyer

MAX

MIN

Real-time / 7 times a weekdata transfer:•Items in stock•Demand forecast

Web-based platform

Buyer owned andmanaged

Warehouse

51

Figure 27: Model 2

Model 2 – 3PL-based VMI

In this model, a 3PL manages the inventory. He receives information on demand-forecast

and shipping suggestions from the buyer according to his production schedule. In his

warehouse, the 3PL replenishes inventory based on pre-defined minimum and maximum

levels (Figure 27). Information transfer takes place over a web-based platform, connecting

the 3PL-owned warehouse and the suppliers.

This model reduces the administrative effort of the buyer, but the 3PL will usually charge a

service and handling fee.

Pull signal:•Suggested shipping orders•Demand forecast

Vendors

Production

Buyer

Real-time / 7 times a weekdata transfer:•Items in stock•Part consumption signal

Web-based platform

3PL offsiteWarehouse

MAX

MIN

52

Figure 28: Model 3

Model 3 – Close collaboration VMI

Three companies have installed a setup in which intensive care is taken of critical parts

and/or critical vendors. In this model, a single vendor owns a warehouse on or close to the

buyer’s premises (Figure 28). From this warehouse, the vendor delivers his parts to the

buyer’s production line. In two cases of the three cases, the parts in the warehouse are

consigned.

The supplier’s warehouse is situated on or close to the buyer’s premises in order to reduce

stock-out situations and assure delivery of mostly critical parts. To compensate the

additional effort, commercial concessions have been made in all three cases. These

concessions include higher item prices, service fees or earlier payment.

Vendor

• Shop floorbuffer

• Production

Buyer

Real-time / 7 times a weekdata transfer:•Demand forecast•suggested shipping orders

1 way web-basedplatform

(2 way planned)

Vendor ownedand managedWarehouse

Kanban

Items in stock

MAX

MIN

53

10 Recommendations for the Implementation

Vendor-managed inventory has proven to be successful practice in a small volume

production environment. It can help the buying firm to concentrate on its customer side

processes and at the same time to reduce its inventory. Potential drawbacks need to be

taken into account, however. The survey has shown that the most common problem is

conflicts with suppliers. To help avoid problems with VMI, we will sum up the key

recommendations derived from the survey along the lines of the VMI framework

introduced at the beginning of this document. Finally, we will propose a procedure for the

implementation.

Revisiting the VMI Framework

In the commercial arrangement (Figure 29), a major issue is the point of transfer of

ownership. The survey has shown that many companies combine their VMI-programmes

with consignment stock and it turned out that they do not experience significantly more

conflicts with their suppliers over inventory ownership or payment.

Figure 29: Recommended commercial arrangement










Coincide with handling

responsibility




delivery

Other

Flow of Information




Other



Signal

Customer Orders


Manual






Weekly


yes No

Flow of Goods


On-site warehouse

Shop-floorbuffer







Onsite Warehouse

Assemby Line

54

Moreover, it makes good sense to implement a consignment stock arrangement in order

to create an incentive to the VMI-partner for keeping optimal inventory levels. While it is

not so common to implement a form of standardised up front compensation scheme in

the case of production delays, we would recommend setting the point of transfer of

custodial ownership of parts to coincide with the transfer of handling responsibility in

order to avoid conflicts in this area.

Companies will need to decide whether to transfer responsibility for the replenishment

decision to a 3PL or let suppliers assume inventory responsibility. Due to the

characteristics of high-value VMI, we recommend to put the vendors themselves in charge

of the replenishment decision. Including a 3PL may be considered when involving a large

number of different suppliers.

The flow of information represents the core of the VMI-system. Inventory responsibility

can only be transferred if sufficient information on stock levels and requirements is

provided. Therefore, the information processes should be designed carefully and IT-

Experts from all stakeholders will need to be involved (Figure 30).

Figure 30: Recommended information process











responsibility




delivery

Other

Flow of Information




Other



Signal

Customer Orders


Manual






Weekly


yes No

Flow of Goods


On-site warehouse

Shop-floorbuffer







Onsite Warehouse

Assemby Line

55

Figure 31: Recommendations regarding the physical process

Some standards seem to have evolved. Companies generally agree replenishment

according to Min/Max levels and use scanners to capture stock information. They transfer

demand forecasts and conclusive information on inventory levels over web-based

platforms daily or even in real-time and let their VMI-partners arrange shipments without

further authorisation.

The goods flow (Figure 31) has to be adjusted to the conditions of each individual

company. We have presented and discussed three alternative models in chapter 9.

However, the survey has revealed that irrespective of other conditions, separating VMI

parts from other parts in the warehouse plays an important role in achieving process

improvements. It will help to reduce process complexity and to win the support from

suppliers who want to have as much transparency of the whereabouts of parts as possible,

in particular in a consignment stock operation. Therefore, we strongly recommend

arranging a designated area for the VMI-parts within the warehouse and create a separate

ERP warehouse (cf. Micheau, 2005).











responsibility




delivery

Other

Flow of Information




Other



Signal

Customer Orders


Manual






Weekly


yes No

Flow of Goods


On-site warehouse

Shop-floorbuffer







Onsite Warehouse

Assemby Line

56

Project Management

Figure 32 presents a recommended procedure for implementing VMI. It may have to be

individually adapted to a company’s needs, e.g. firms may want to involve key suppliers

already in the system design phase or selects parts before defining the processes.

However, it will give good first guidance to the project manager.

Throughout the implementation of VMI, communication between all related partners is

crucial. The project manager will have to ensure that communication keeps going beyond

implementation to avoid conflicts.

Like any such change in procurement processes, the implementation of VMI will require

support from a number of different stakeholders – internal and external. The consistently

positive picture drawn by the participants of our survey can help win this internal support.

Especially the fact that all companies including the more experienced ones are planning to

expand their VMI-programmes shows the success of this concept throughout the small

volume industries. It will also help to know that combining VMI and consignment stocks –

against all expectations – does not create more problems or conflicts.

Once internal support is gathered, external stakeholders, i.e. VMI-partners, need to be

convinced. Their potential for process improvements thanks to better transparency should

be the basis of negotiations. If a consignment stock arrangement is considered, the fact

that it is common practice in our sample and the measures presented to avoid conflicts,

should help to convince VMI-partners of its feasibility and significance. Some companies

mentioned that the prospect of becoming a single source helped convincing suppliers.

Open and frequent personal communication will be the key to success for any VMI

project.

57

Figure 32: Recommended Implementation Process

Select Team

Including • Purchasing• Logistics• IT• Assembly staff

Set Targets

• Inventory reduction• Administrative cost reduction• Improved service levels

Define Set-up based on own capabilities

Commercial arrangement

• Consignment Stock• Custodial Ownership• Guaranteed Payment

Information processes

• Data to be transferred• ERP arrangement (separate warehouse, booking procedure, purchase order arrangement)• Replenishment system• Data transfer platform

Physical processes

• Separate warehousing space• Direct delivery to assembly or via warehouse• Location of warehouse

Select Suppliers and Parts

• Suppliers based on closeness of relationship and capabilities• Parts based on value, demand stability and physical characteristics

Negotiate with suppliers

• Present the desired solution and advantages to the supplier

Define supplier/part specific set-up

• Stock levels• Commercial arrangement• Information process• Physical process

Implement the VMI system

• Change contract• Set up information systems• Prepare warehouse/ shop floor accordingly

58

11 Glossary

Consignment Stock Consignment Stock is stock at a buyers’ premises

which is owned by the vendor - usually until it is used

or sold by the buyers

High-Value Parts Used to distinguish the parts in question here from

low-value items which are often managed through a

C-Part Kanban System

SCM Supply Chain Management

VMI Vendor-managed Inventory: The buyer provides

additional information to enable the vendor to

manage inventory at the buyer’s site. Sometimes

also referred to as Supplier Managed Inventory.

VMI Partner The party managing the inventory, can be the

manufacturer, a wholesaler or a logistics service

provider

3PL Third Party Logistics Provider

59

12 Bibliography

Blackhurst, J., Craighead, C., & Handfield, R. (2006). Towards supply chain collaboration:

an operations audit of VMI initiatives in the electronics industry. International Journal of

Integrated Supply Management , pp. 91-105.

Disney, S. M., & Towill, D. R. (2003). The effect of vendor managed inventory (VMI)

dynamics on the Bullwhip Effect in supply chains. International Journal of Production

Economics , pp. 199-215.

Eitelwein, O., Goldsby, T. J., Pohlen, T. L., & Wallenburg, C. M. (2008). The Evolution in

Supply Chain Replenishment Models: New Opportunities to Create Value. Supply Chain

Management , pp. 15-23.

Gümüs, M., Jewkes, E. M., & Bookbinder, J. H. (2008). Impact of consignment inventory

and vendor-managed inventory for a two-party supply chain. International Journal of

Production Economics , pp. 502-517.

Kuk, G. (2004). Effectivness of Vendor Managed Inventory in the electronics industry:

Determinants and outcomes. Information and Management , pp. 645-654.

Lee, H. L., Padmanabhan, V., & Whang, S. (1997a). Information distortion in a supply

chain: The Bullwhip Effect. Management Science , 4, pp. 543-558.

Lee, H. L., Padmanabhan, V., & Whang, S. (1997b). The Bullwhip Effect in Supply Chains.

Sloan Management Review , 3, pp. 93-102.

Micheau, V. A. (2005). How Boeing and Alcao implemented a successful Vendor Managed

Inventory program. The Journal of Business Forecasting , pp. 17-19.

Sarpola, S. (2007). Evaluation framework for VMI systems. Helsinki: School of Economics.

Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2008). Designing and managing the supply

chain: concepts, strategies and case studies. New York: McGraw-Hill/Irwin.

Som, O. (2007). Strukturen und Treiber des Innovationserfolgs im deutschen

Maschinenbau. Innovationstag 2007. Frauenhofer Institut für System und

Innovationsforschung, Magdeburg.

Supply Chain Digest. (2009). Supply Chain Digest. Retrieved January 12, 2010, from

http://www.scdigest.com/assets/newsviews/09-04-29-1.pdf

60

Documents

Vendor-managed Inventory for High Value Parts€¦ · management and holding strategies. Vendor-managed inventory (VMI) has become an option not only to C-class parts but also to